Facebook moves to consolidate IPO lawsuits

Facebook said its conversations with underwriters were 'customary' and 'did not violate any rules'

By Cameron Scott | 15 June 12

Facebook has petitioned the U.S. courts to consolidate more than 30 lawsuits filed in connection with its ill-handled initial public offering.

The company argued in a court brief that the lawsuits filed against Facebook, some of its directors, the underwriters for its IPO and the Nasdaq stock market should be heard together in the federal court in the Southern New York district.

The cases rely on a "common nucleus of facts concerning the IPO and the decline in the price of Facebook shares," the company said in its brief, filed Thursday. Consolidating the cases will avoid duplication of discovery and possible inconsistent rulings, its lawyers wrote.

The lawsuits fall broadly into two categories. Those against Facebook and its underwriters allege Facebook shared information about the health of its business with analysts at the underwriters, including Morgan Stanley, who then shared the information verbally with large institutional investors, without disclosing it to the wider investing public.

That put smaller investors at a disadvantage and was a violation of federal securities laws, the lawsuits allege.

The second category of lawsuits, against the Nasdaq, stem from the technical problems that caused Facebook shares to start trading roughly a half-an-hour late on the morning of May 18, resulting in confusion among some investors about whether they had successfully traded shares and at what price.

Facebook's brief provides clues about how it might defend itself against the charges that it violated securities laws. The company said it is "customary" for underwriting firms to develop "forward-looking guidance" in close conversation with the companies they represent.

The lawsuits ignore that "what Facebook and the Underwriter Defendants allegedly did both followed customary practices and did not violate any rules," the brief states. The theory that it was "improper for analysts to discuss their forecasts with 'preferred' investors" is "unprecedented," Facebook's lawyers argued.

With respect to the Nasdaq's technical problems, Facebook doesn't dispute that they may have caused its stock price to sink on the opening day of trading. It notes that press reports at the time suggested the problems spurred "a cascade of selling" that made it appear as if investors were "turning against Facebook" and caused some hedge funds to "sell their entire positions because of the confusion."

Facebook filed its motion with the United States Judicial Panel on Multidistrict Litigation in Washington, D.C.